Pressured by Prime Minister Shinzo Abe to share some of their record profits, and by increasingly obsolescent equipment, Japan’s companies are starting to boost their investment spending.
Policy makers have unleashed a public campaign to encourage the rebound, a new focus for the Abe administration after it saw some evidence of results from telling companies to increase wages. Whether the revival in capital spending keeps going will help determine the strength of Japan’s recovery in the remainder of the year.
“Abenomics, aimed at a virtuous cycle in the economy, is entering a new stage -- more than anything, the key to raising productivity is investment,” the prime minister told executives at a gathering of the country’s biggest business lobby on June 2 in Tokyo. “No matter how much we proceed with reforms, they are meaningless unless private companies implement investments.”
Government data in recent days provide grounds for optimism. A report Wednesday showed that orders for machines, regarded as an advance indicator for capital spending, rose for the fifth time in six months in April. That suggested a positive start to the second quarter, after non-residential investment in the first three months of 2015 advanced the most in a year.
With a shrinking population providing a disincentive to invest at home, Abe’s campaign faces daunting challenges. He’s now trying to turn that argument on its head, encouraging companies to invest in robots and automation.
Economic output rises when there are more workers producing goods and services -- or they work longer hours -- and when employees put out more during the time they do work. Given prospects for fewer workers in Japan, Economy Minister Akira Amari told reporters in Tokyo Tuesday that corporate spending that boosts productivity is important.
The hope is that with consumer prices now seen rising again and corporate tax rates being brought down, companies embrace the need to upgrade their buildings and equipment, and spend on automating tasks previously done by workers.
Retailers and other services companies, along with makers of consumer electronics and the transport industry, have been among the key drivers of recent gains in capital spending, Ministry of Finance data show.
“The possibility that a broadening of the domestic capital investment base will be realized in 2015 is increasing,” Deutsche Bank AG economists, led by Mikihiro Matsuoka in Tokyo, wrote in a June 5 note. Small and medium-sized companies, forced to invest given their struggle to find enough workers, are now being joined by manufacturers and large companies, according to Deutsche Bank.
“That said, we caution against too much excitement in light of the substantial downward revisions in capital investment plans seen in the latter half of each of the past few years,” the Deutsche Bank analysts wrote.
Today’s spending figures are still well below historical numbers. Unadjusted for price changes, non-residential fixed investment last quarter was 27 percent lower than the peak reached in the first three months of 1991.
Abe made clear that he’s not satisfied.
“The environment for a radical shift toward management that goes on the attack is in place,” Abe told business leaders at a general meeting of the Keidanren lobby group last week. “However, one cannot really say the moves in private investment that are at last starting have been daring.”
The prime minister further goaded his compatriots, holding up how foreign companies have been leading the way in their own nation, boosting investment more than 10 times since he came to office in December 2012. Abe showcased how Apple Inc. -- whose products have done much to throttle Japan’s consumer-electronics giants -- has decided to build a large-scale research center in Yokohama.
“The protagonist on the new stage will be the investment of your private businesses,” Abe said. “I am expecting you to make bold decisions.”